Ouch, My Wrist

For all the fanfare over the National Mortgage Settlement that was eventually agreed to by 49 state attorneys general, you’d think the banks were actually being held accountable or something.

I know, that would be nice.

It’s better than it was, specifically in that the scope of what the banks get off the hook in exchange for the the settlement was narrowed considerably, to mostly “just” the robosigning problem. (I’m still waiting to hear a crime of forgery and theft committed by a real person instead of a corporate “person” described as “just a technicality.”)

And some money to help struggling homeowners is certainly better than no money, especially a bunch directed at principal reduction, and especially in times where federal and state budget makers are doing asinine things like zeroing out foreclosure counseling funds (ahem, Cuomo) and operating grants to local housing organizations that run housing counseling agencies and otherwise try to handle the fallout of the wave of foreclosures (ahem, ahem, Cuomo).

All that said, the settlement is pretty pathetic given the monumental nature of the crimes, the bailouts, the ongoing suffering, and the ongoing profits the lenders are earning.

The 46-state 1998 tobacco settlement was $206 billion—all in cash payments. The mortgage settlement is $26 billion, but only $5 billion of that is cash payments from the wrongdoers. The rest is “homeowner relief.” This, loosely translated, is forcing the banks to write down assets to their actual value, which could be argued as being actually in their best interests. After all, Ocwen, on track to be the largest servicer of subprime loans in the country, and definitely no starry-eyed charity, has decided that in a large percentage of cases, principal reduction produces the best results for the investors. They generally lose less than they would if they forced through a foreclosure and then put the empty house on the market.

Also, the banks hold a bunch of at-risk second mortgages that are going to be saved by the principal reduction for first mortgages being “forced” on them, prompting Yves Smith at Naked Capitalism to call it a “stealth bailout.”

So while forcing the banks to make principal reductions is good for the homeowners, it’s certainly not usually going to be the banks giving up any value they actually possess. And when it comes to securitized loans, even the paper loss is largely going to be felt by investors—including a bunch of pension funds, 401(k)s, and Fannie and Freddie, i.e. the taxpayers. (The claim on the settlement’s site that it is not funded by taxpayers is therefore technically “true,” but misleading.)

But even leaving aside where the settlement is coming from, let’s take the $21 billion in homeowner relief. There are 11 million homeowners who are underwater, according to the New York Federal Reserve. Since 2006, $7.3 trillion in home equity has evaporated.

There are 3.5 to 5 million loans, depending on who you ask, that are seriously delinquent or in foreclosure as of January 2012. So the settlement comes to $4500 to $6000 for each of them—if it all went to actual principal reduction, which it won’t. The New Bottom Line coalition has estimated that writing down the principal of underwater mortgages to current market value would cost more like $71 billion. They also estimate this would create one million jobs, as “Six billion dollars per month that is currently going to mortgage payments would instead go toward buying groceries, school supplies, and other household necessities.”

Now $71 billion is a lot bigger than $26 billion. But it’s still less than half of $156 billion—which was the amount of bonuses paid by the seven biggest banks in 2011.

Yves Smith over at Naked Capitalism has a marvelous takedown of the settlement (bit.ly/wVBdJG) that gets into a number of other problems with it as well. On the $2,000 payments to victims of robosigning, she writes: “We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. . . It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.”

And perhaps the biggest one of all: While we’re all glad that Eric Schneiderman is going to keep pursing investigations, this settlement makes a little hard to believe that task force will be as robust as is needed. “It’s a bad idea to settle obvious, widespread wrongdoing on the cheap,” writes Smith. “You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove.”

We should have done better. But the worst thing we could do now is consider the matter closed.